Kellogg Battling to Regain Its Place at the Breakfast Table

The casualties are mounting in Battle Creek.

Kellogg Co., its growth and stock price as stale as a day-old bowl of cereal, said Monday that the president of its flagship North America division, Thomas Knowlton, resigned effective immediately--its second top executive to leave in the last week.

The shake-up at Battle Creek, Mich.-based Kellogg--the head of its European operations quit Sept. 15--is the latest fallout from the company’s struggle to reignite its sales and earnings and to halt a decade-old slide in its share of the U.S. cereal market.

“They’re at the point where something has to be done,” said Patrick Schumann, an analyst at the brokerage firm Edward D. Jones & Co. in St. Louis.

Kellogg, the maker of Frosted Flakes, Rice Krispies and Special K, is still the nation’s biggest producer of ready-to-eat cereal. But its share of the U.S. cereal market has dropped to 32% from 41.4% a decade ago, according to Information Resources Inc., a research firm in Chicago.

In fact, General Mills Inc. is closing in on Kellogg’s lead, in good part because General Mills bought Ralcorp Holdings Inc.’s brand-name cereal division, whose products include Chex cereals, in late 1996. General Mills’ share is now 31.3% of total dollar sales in the U.S. market, according to IRI.

But the overall market is also rapidly shrinking, and now stands at $7 billion in annual sales, down from $8 billion just five years ago, IRI reports. Analysts give two main reasons: Sharply rising cereal prices earlier this decade turned off many shoppers to branded cereals, and breakfast alternatives such as nutrition bars and bagel shops are cutting into cereal sales.

And investors are signaling that they’re losing confidence in the ability of Kellogg and its chief executive, Arnold G. Langbo, 61, to fix the problem and get the company’s profit growing again.

Kellogg’s stock price has tumbled 25% over the last 12 months, a slump that started well before the general stock market began its sharp drop in August. Indeed, Kellogg’s stock--which closed Monday at $33.75 a share, down 56 cents on the day, in New York Stock Exchange composite trading--now languishes below its level of six years ago.

The price drop also reflects investors’ worry that Kellogg will again use price cuts and other promotions, as it did in 1996, to quickly regain market share. That would please consumers but further erode Kellogg’s profitability unless it could just as quickly lower its operating costs.

Kellogg spokesman Anthony Hebron said “there will be no across-the-board price actions” by the company. But Jones’ Schumann said, “I don’t think any options are closed at this point,” and other analysts said Kellogg has left the door open for selected price cuts on its most popular brands.

Hebron declined comment on whether Knowlton, 52, was forced out, and his successor was not immediately named. On Sept. 15, Donald Fritz, president of Kellogg Europe, also resigned.

Though the changes create even more upheaval for Kellogg, “to beaten-down Kellogg shareholders, [this] change is a positive because the team has not been winning,” said Prudential Securities analyst John McMillin.

As for Kellogg’s performance, Hebron said the company is taking several steps to jump-start its growth. For instance, Kellogg has introduced new products aimed at making cereal eating more convenient, such as Breakfast Mates, which are cereal-and-milk packets sold in the refrigerated aisles of supermarkets. Another one, Snack Paks, are single-serve pouches of its most popular cereals.

Kellogg also is reviewing its U.S. advertising efforts, and it’s taking a companywide look at its costs to see where it might make savings. Earlier this month, it announced plans to review the work done by its more than 2,000 salaried employees in North America, setting the stage for possible white-collar job cuts.

And in June, Kellogg promoted Carlos Gutierrez to be president and chief operating officer. Gutierrez, who had been executive vice president for global business development, is seen as a potential successor to Langbo.

But Kellogg has said that its spending on new products and marketing will chip away at profit, with earnings for all of 1998 trailing its prior-year results by up to 15%. Kellogg last year earned $564 million, after excluding a one-time accounting charge, on sales of $6.8 billion.

Conversely, General Mills--which sells Cheerios and Total, among others--is still enjoying growing profit. Last week, it said net income for its fiscal first quarter ended Aug. 30 rose 8% from a year earlier on a 4% increase in sales.

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Bloomberg News contributed to this report.

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Cereal Numbers

Kellogg Co. is still the nation’s largest producer of ready-to-eat cereal, but its lead is narrowing as the entire U.S. cereal market contracts. U.S. market share:

Kellogg: 32.0%

General Mills: 31.3%

General Foods (Post): 16.4%

Quaker Oats: 8.8%

Store brands: 7.8%

Other: 3.7%

Source: Information Resources Inc.